Clarification regarding tax on capital gains at the time of rollover of FMP’s

Posted on August 31, 2015

Clarification regarding tax on capital gains at the time of rollover of FMP’s which are closed ended schemes

Capital gain in respect of units of mutual funds under the fixed maturity plan (FMP) on extension of their term before 10.07.2014 and after 10.07.2014

Finance act, 2014 changed the period of holding in case of unlisted shares and units of mutual funds other than equity oriented fund for capital gain tax purposes.

FMP’s are classified as closed ended funds which have fixed maturity date and duration of the investment is decided upfront. Prior to amendment by finance act, 2014 assets in nature of listed securities, shares, units of mutual funds and zero coupon bonds were qualified as long term capital assets if they were held for a period of more than twelve (12) months. And an as such earlier unit of mutual funds in FMP’s which were held by the assessee for more than 12 months were classified as long term capital assets.

However after the amendment under section 2(42A), period of holding in case of unlisted shares and units of mutual fund other than equity oriented fund has been extended to more than thirty six (36) months. Now in case of investment in units of FMP’s made earlier and redeemed after 10.07.2014, gain would be chargeable to tax as short term capital gain if period of holding is less than or equal to 36 months.

However in case of investment in units of FMP’s made earlier and redeemed before 10.07.2014, gain would be chargeable to tax as short term capital gain if period of holding is less than or equal to 12 months.

Now owing to this amendment by finance act, 2014, to enable FMP’s to classify as long term capital asset, some Asset management company (AMC’s) who administers the mutual funds schemes have offered for extending the tenure of FMP’s to a date beyond 36 months by providing an option to investor for rollover in accordance with mutual fund regulations of SEBI.

In this regards CBDT has clarified for applicability of tax on capital gains in the hands of the assessee being unit holder at the time of FMP’s roll over that are closed ended schemes.

CBDT vide circular no. 6/2015 dated 09.04.2015 has clarified that as per regulation 33(4) of the SEBI (Mutual Funds) regulations, 1996 in case of roll over where the scheme remains the same and no different scheme comes into existence, no transfer as such takes place and accordingly no capital gain will arise on this transaction. Regulation 33(4) provides the following

“A closed ended scheme shall be fully redeemed at the end of the maturity period, provided that a closed ended scheme may be allowed to be rolled over if the purpose , period and other terms of the roll over and all the other material details of the scheme including the likely composition of assets immediately before the roll over, the net assets and net asset value (NAV) of the scheme are disclosed to the unit holders and a copy of same has been filed with the board, provided further that such roll over will be permitted only in the case of those unit holders who express their consent in writing and the unit holders who does not opt for the roll over or have not given written consent shall be allowed to redeem their holdings in full at net asset value (NAV) based price. “

Therefore gain on redemption of units of mutual funds in FMP’s not being units of equity oriented fund will be chargeable to tax as capital gain in the following manner:

If units under FMP’s of closed ended schemes are purchased earlier and are redeemed before 10.07.2014, than gain arising on such redemption will be short term capital gain if period of holding is less than or equal to 12 months, otherwise gain will be long term capital gain if period of holding is more than 12 months. In such a cases if there is long term capital gain than tax will be @20% with indexation benefit and in case there is short term capital gain, tax will be as per normal income tax slab after including other income with short term capital gain.

If units under FMP’s of closed ended schemes are purchased earlier and are redeemed after 10.07.2014, than gain arising on such redemption will be short term capital gain if period of holding is less than or equal to 36 months, otherwise gain will be long term capital gain if period of holding is more than 36 months. In such a cases if there is long term capital gain than tax will be @20% with indexation benefit and in case there is short term capital gain, tax will be as per normal income tax slab after including other income with short term capital gain.

If units of FMP’s are not redeemed after 10.07.2014 and option of roll over is exercised by the unit holder than roll over will not be chargeable to capital gain tax being not regarded as transfer. However capital gain will arise when such units which are rolled over are redeemed later on. And as such when these units will later on be redeemed gain arising on such redemption will be chargeable as capital gain as short term capital gain if period of holding from earlier date not from the roll over date is less than or equal to 36 months at normal rates otherwise tax on gain @20% with indexation benefit in case of period of holding from earlier date not from the roll over date is more than 36 months will be chargeable as long term capital gain.

If roll over option is not exercise by the unit holder than units will be redeemed and accordingly gain arising on such redemption will be short term capital gain if period of holding is less than or equal to 36 months, otherwise gain will be long term capital gain if period of holding is more than 36 months. In such a cases if there is long term capital gain than tax will be @20% with indexation benefit and in case there is short term capital gain, tax will be as per normal income tax slab after including other income with short term capital gain.